With all the talk of foreclosures and short sales, I thought this brief article on why short sales don’t work 99% of the time might be helpful to homeowners in financial stress (or foreclosure), to buyers seeking to find a steal in this real estate market, and to real estate agents wanting to handle a short sale (as a listing or as a buyer’s agent).
First, I don’t want you to think I have no clue on this subject. Between practicing real estate law for 20 years (and having done many foreclosures and forfeitures and short sales) and being an Real Estate Broker now, I know the process of foreclosures and short sales intimately.
Second, I also don’t want you to think I am insensitive to sellers who need help selling their distressed property or to buyers who are looking for a good deal. I love helping people. That’s why I do what I do.
After handling hundreds of transactions over the past 30 years involving many foreclosures and short sales, I would say to any buyer wanting to buy a property prior to the Trustee’s Sale date (foreclosure) via a short sale, or to any seller wanting to sell their home as a short sale (assuming there is not enough money to continue to make the monthly payments on the mortgage) . . .
Here’s why. The short sale departments of banks and other large corporate entities in the sky have been forced to accept extremely cumbersome investor requirements that will make the transaction all but impossible for both buyers and sellers.
I recently decided to help a good client by listing his home and trying to sell it as a short sale, because it is worth less than the mortgage balance, and because he ran out of money and no more monthly payments would be made on the mortgage. I did my comps, listed it, advertised the heck out of it, promoted it in the MLS, fielded dozens of calls from both Realtors and prospective buyers, spent a lot of time working with the short sale department, put together all the documents they required in their checklist, got all those documents signed and faxed to the short sale folks, coordinated two offers on the property and submitted those to the short sale department, only to be told when I did a follow up call . . .
“Oh, we have another checklist of items we now require in this phase of the short sale process, and we need the seller’s last two year’s tax returns, his complete financial statement (income and expenses, assets and liabilities), his bank statements for a period of months, a HUD-1 Settlement Statement, and . . . ,” and the list went on. But this was only the second checklist. I was informed there would be another.
When a homeowner loses their job bad things happen. There are ugly consequences to running out of money in this life, and some of the typical consequences include constant harassment by creditors on the phone and by mail, arguments at home under the financial stress, often divorce, separation from family and loved ones, loss of important possessions of great personal value, loss of connectedness with loved ones and friends, feelings of depression (often accompanied by thoughts of suicide), and additional crises with their own devastating consequences, such as the inability to meet child support payments, which results in automatic suspension of a driver’s license and possibly the suspension of professional licenses so you can’t drive to work or even making a living anymore, assuming you even have a job. I have learned about these terrible consequences through many clients over the years, and I’ve learned some of them through my own personal trials.
On top of these consequences, homeowners are often forced to move out of the home and to another area to search for work. Have you ever seen a psychological checklist of stress items? Check a bunch of them, and the stress level goes through the roof. That’s where many people are when their home is in foreclosure and when they are trying to get it sold.
In the midst of this the short sale department of almost every bank will “require” that the items on their multiple checklists be completed in order to “process” the short sale. Does anyone really think a distressed homeowner is emotionally capable of spending many hours putting all this information together with narrative explanations of how their life has fallen apart?
Not likely. “Let them foreclose on the home. My credit is shot anyway.” That’s the logical answer of a homeowner.
What about buyers?
If you’re trying to purchase a home as a short sale, without the seller’s full cooperation with the short sale department ad infinitum, it is impossible to get through.
Someone who knows just enough to be dangerous might say, “Well, I’ll just bid at the foreclosure sale.” That may be a dead end, too. The bank is going to want the current balance of the mortgage plus accrued interests and costs as the minimum bid. No one will do that in an upside down situation. So the bank will bid minimum, take it back, process it to get title in their name, send it to an REO to get it listed with a Realtor, put it back on the market at a listing price still too high, and it will be listed for sale for 256 days (or longer) while it either gets terribly run down and is worth far less, or the bank continues to pump money into this black hole in the form of property taxes and maintenance. So now we are about two years-literally-from the date of default on the mortgage payments by the homeowner. No one claims the banks or their short sale departments are wise (or should we say their investors who lay down all these requirements).
By the way, I’m told by the local rep conducting the Trustee’s Sales that virtually no one is bidding on the dozens of homes he is taking to the court house steps. The prices are way too high. If it’s not a good deal, no one will bid, and that’s what is happening.
I can count on two fingers the number of great short sale deals I’ve seen out of hundreds of possible transactions, which makes all the work and the low probability of success just ridiculous. You can make more money working at McDonald’s than you can chasing foreclosure deals or short sale transactions in the present system. I know, someone out there knows someone who knows someone who popped a $75,000 profit on a deal. Right. And I know someone who knows someone who won the state lottery back in ’82.
This whole scenario is a disaster for Realtors, too. On a $225,000 short sale, the selling side commission is about $5,000 and maybe $7,500 if you get the bank to pay a really high percentage. But the odds of getting this sale through are 1 in a 1,000, or some low probability. It would be one thing if a Realtor was working at minimum wage, but to work for nothing for six to 10 months when the sale cannot be consummated is a serious waste of time and energy. Once answer for Realtors would be to charge a reasonable up front fee, such as $3,000. But sellers in foreclosure can’t afford to pay that, and buyers simply won’t pay a buyer’s agent $3,000. In theory they will, but in practice no. Would I spend a lot of time on a short sale if I got an up front fee? Yes, but seriously it would have to be $5,000, and no one is willing to pay me $5,000 up front for six to 10 months work, which works out to be about minimum wage. If there were a guaranteed result, maybe, but there are no guarantees with short sales.
Life is too short to waste it chasing pipe dreams. I say, “Let the banks go through the entire foreclosure process, list the homes at excessive prices, and end up selling them at garage sale prices two years later. Maybe if they lose enough money, they will finally start to realize they need a system that actually works.
Read more articles on this site about foreclosures and short sales at Foreclosures and Short Sales.
Last Updated on July 21, 2009 by Chuck Marunde
I couldn’t agree more. I am trying to buy a short sale, alredy one fell through. I am on my second home now and just had the apprasial, which came in lower then purchase price. It’s been a nightmare to get the bank to negoiate to the new appraised value. My bank is going to deny my loan if we cant agree on a price. The I have to reapply for a motgage because the banks cannot wait forever for the seller’s bank to make a new contract. This is a horrible experice. I am glad it;s not my primary home.